Acadia Healthcare Company (NASDAQ:ACHC) Might Have The Makings Of A Multi-Bagger

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Acadia Healthcare Company (NASDAQ:ACHC) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Acadia Healthcare Company, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.10 = US$523m ÷ (US$5.5b - US$482m) (Based on the trailing twelve months to March 2024).

Thus, Acadia Healthcare Company has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Healthcare industry average of 11%.

Check out our latest analysis for Acadia Healthcare Company

Above you can see how the current ROCE for Acadia Healthcare Company compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Acadia Healthcare Company for free.

How Are Returns Trending?

You'd find it hard not to be impressed with the ROCE trend at Acadia Healthcare Company. The data shows that returns on capital have increased by 64% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 21% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

The Bottom Line On Acadia Healthcare Company's ROCE

In the end, Acadia Healthcare Company has proven it's capital allocation skills are good with those higher returns from less amount of capital. And with a respectable 99% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Like most companies, Acadia Healthcare Company does come with some risks, and we've found 1 warning sign that you should be aware of.

While Acadia Healthcare Company may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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